RBI rejigs 'too big to fail' tag for NBFCs
Mumbai, Oct 23, 2023
A scale-based regulatory framework announced earlier was notified by RBI in its new master direction for non-banking financial companies last week. The new framework does away with the classification of 'systemically important' NBFCs - a concept that was introduced after the global financial crisis to identify finance companies that were 'too big to fail'.
The earlier norms had resulted in even relatively smaller-sized finance companies being classified as systemically important because of the definition, which included NBFCs with assets over Rs 500 crore. Now that RBI has removed the reference to the systemically important NBFCs, only the larger ones will be subject to the more stringent regulations.
Under the new scale-based regulatory framework, NBFCs with over Rs 1,000 crore assets are part of the mid-layer, and only the top 10 NBFCs in the country are part of the upper layer.
"In October 2021, RBI brought in a scale-based regulatory framework under which NBFCs with assets below Rs 1,000 crore were categorised in the base layer, while those with assets of Rs 1,000 crore and above were in the middle layer. However, some confusion arose for NBFCs having assets of more than Rs 500 crore but less than Rs 1,000 crore, as they were defined as systemically important under earlier directions and were required to comply with the separate guidelines applicable to them," said Vidushi Gupta, partner, Khaitan & Co. According to Gupta, the systemically important guidelines had some more stringent norms.
"Under the systemically important directions, credit concentration norms specified lending and investment limits to a single company or group. These norms applied solely to systemically important NBFCs. The scale-based regulations made adjustments to these norms, making them applicable only to middle-layer and above NBFCs. Prior to Friday's master directions, there was ambiguity in the regulatory regime and an NBFC with Rs 600 crore in assets had to follow concentration norms due to the continued applicability of erstwhile directions applicable to systemically important NBFCs," said Gupta.
The master directions, however, continue to have the requirement for the top 15 NBFCs to list on the stock exchanges. This would mean that companies like Tata Sons, HDB Financial Service (a subsidiary of HDFC Bank) and Bajaj Housing Finance will have to get listed on the stock exchanges.
[The Times of India]
